French Oil Protectionism And the International Political Economy of Rent Seeking Julien Brault1 Abstract Quantitative protectionism, more precisely import substituting industrialization through quantitative trade restrictions, has been one of the most popular development policies of the 20th century. The researches led around Anne Krueger, based on scarce data from Third World countries, concluded on its overall inefficiency, caused by rising macroeconomic costs and rent capture. One of the most ambitious implementations of import substitution, French oil protectionism created detailed archival data which allow to quantify its costs and gains for more than half of the 20th century. Contratry to Krueger's findings in Third World countries, we show that the yearly macroeconomic cost of the policy, an average of 3% of GDP, remained under control and gradually decreased from the 1960s. Detailed biases of quota allocations show that rent seeking linked to big companies and dominant geographical places remained limited. We show how the shifts in trade protection linked to the weight of social-administrative groups in quota juries brought the biggest imbalances to the system. After the discovery of oil in Algeria, social-administrative rent seeking increased the political instability of the Fourth Republic and peaked as soon as the end of the 1950s. Hence, in the case of French oil, quantitative protectionism was macroeconomically efficient in the long run, but created medium term political instability. Keywords : Trade Protectionism, Import Substitution, Quantitative Restrictions, Oil, Rent capture, Rent seeking JEL : F13, N14, O14, O24, Q48 1 PhD, Graduate Institute of International and Development Studies, Geneva. E-mail : [email protected] . Phone : +33664080441 . 1 “Gret red gods, great yellow gods, great green gods, planted at the edges of the speculative tracks along which the mind speeds… Scarcely ever before has man had the pleasure of seeing destiny and force look so barbaric… These modern idols share a parentage that makes them doubly redoubtable. Painted brightly with English or invented names, with one long and supple arm, a luminous, faceless head, a single foot, and a belly stamped with numbers – the gas pumps sometimes take on the appearances of Egyptian gods, or those of cannibal tribes who worship nothing but war. O Texaco Motor Oil, Esso, Shell ! Great inscriptions of human potentiality ! Soon shall we cross ourselves before your fountains, and the youngest among us will perish for having contemplated their nymphs in naphta.” Aragon, Paris Peasant, 1926. I - INTRODUCTION1 Since 1945, the progressive decrease in customs duties in the world has been accompanied by a parallel development of quantitative restrictions of trade and financial flows. Quantitative restrictions of trade have been enacted through licences or quotas. Quantitative restrictions of financial flows took the form of bilateral or multilateral clearing accounts, or of foreign exchange control. One of the main aims of those policies was to protect domestic markets in order to substitute national production to foreign imports. Concerning a broad number of emerging countries, Anne Krueger and Jagdish Bhagwati’s researches attracted in the 1960s and 1970s the attention of the public and of the international organizations on the drawbacks of such policies (Bhagwati 1978). The OECD asserted that the objective of industrialization through import substitution was quickly encountering the limits linked to rent capture. 1 This working paper is based on extended researches from my PhD thesis, which presented a first analysis of French quantitative trade and capital flows restrictions (Brault, J. (2013a). The International Transactions of France from the 1920s to the 1970s, unpublished PhD thesis, Graduate Institute of International and Development Studies, Geneva.). I also researched French foreign exchange control (Brault, J. (2013c). "The Political Economy of French Foreign Exchange Control"). My works are available on www.julienbrault.net. I would like to thank Marc Flandreau, Gopalan Balachandran and Dominique Barjot for their continuous support and guidance. Comments from Alain Beltran, André de Lattre, Olivier Feiertag and Giacomo Luciani also helped in improving this paper substantially. I would also like to thank the participants of the the Historical Mission of the Bank of France Seminar, the International History and Politics Seminar of the Graduate Institute of International and Developement Studies of Geneva, the International Finance Chair Seminar of SciencesPo, the Roads of Oil Total Conference, the Diplomacy and Natural Resources Colloquium, and the European Conference on African Studies. Archival and data help from the French Oil Professionnal Comitee (CPDP), the French Oil Institute (IFP), Total S.A, INSEE, the Bank of France, the London Petroleum Institute, and Worldscale, is gratefully aknowledged. 2 “The experience of France shows how, when one is engaged in this path, it is hard and long to modify the structures and to transform the state of mind of the producers. Hence, it appears indeed that the policy consisting in substituting national production to imports – unavoidable and legitimate in itself – is meeting, after fifteen or twenty years, rising difficulties, and constitutes an obstacle to economic growth” (OECD 1975). The high point of this dismissal movement was the World Bank report of 1987, which rejected quantitative restrictions as a long term development policy (World Bank 1987). This in turn fitted into a broader movement of liberalization, which led to the Washington consensus of 1989. Many quotas were nonetheless maintained, notably in developed countries, in agriculture and textile, throughout the 1980s. Import quotas, notably in North America, for sugar, milk products, textile, automobile and metal products, certain dating back to the 1930s, were then the subjects of many studies (see notably Feenstra 1989 and Anderson 2003). These macroeconomic studies, comparing many general indicators in a great number of countries, have been criticized, and researchers have been increasingly calling for studies of precise episodes of restrictions (Edwards 1993). French oil protectionism was one of the best examples of quantitative trade restrictions. Representing approximately one tenth of national imports and State income in the long run since the interwar, French oil nurtured a rent seeking process in the public office. These processes gravitated around the "Corps", official administrative bodies composed of alumni of major universities, the "Grandes Ecoles". A particular social- administrative group of mining engineers has been particularly accused by the historiography of capturing oil profits thanks to its control of a rentier State (Yates 2010). This central role of oil as well as the access to continuous and trustful statistical sources invite us to study French oil products import restrictions. Created during the First World War under the form of licenses, formalized by a law into quotas in 1928, replaced by automated mechanisms after 1980, and abolished in 1992, they lasted 52 years with formalized restrictive quotas, 64 years if the automated period is included, and 78 years including the licensing period. 3 Actors of this policy have, at the time, cast a positive look at its efficiency. Louis Pineau, head of the organization in charge of oil quotas, asserted for instance in 1934 : “This law (instituting the quotas), now evaluated and imitated by numerous countries such as Japan, Italy and Germany (sic), proved to be a flexible instrument required by still a complex task. I think flexibility is a key to its value and merit”1. Have oil products import quotas in France been full of “value and merit”, or an “obstacle to economic growth” ? The following section presents our summarized findings (II). We then go on by presenting the theoretical questions regarding quantitative restrictions (III) and a historiography of French oil (IV). The fifth section presents the data and explains our choices of indicators (V). We then present the results of our empirical study (VI), before a conclusion (VII). II - MAIN FINDINGS This study seeks to assess the efficiency of one of the main protectionist policies of the world in terms of volume in the 20th century. Previous researches on quantitative trade restrictions relied on scarce statistical evidence, often an extrapolated ratio of authorized quota for one sector, one country and one year. We detail the rich available data for the case of French oil, as well as its limits. Notably, we couldn't find at this stage a decomposition of French oil imports from Algeria per company, and detailed life curricula of the members of the administration boards of French oil companies. Nonetheless, our study allows to build relatively continuous and elaborate indicators in the long run. Detailed ratios of quota authorizations could be computed per companies, geographical spaces and social-administrative groups. Over the core, 1 Catta and Lemasson, "Approval of the law of 1928", archives of Total S.A . 4 formalized and restrictive quota period of 1928-1980, excluding the war, the industrialization rent, i.e. the macroeconomic cost of the policy, could be computed for 56 % of the years, and rent capture for 95 %. A new narrative of French oil history and an assessment of the efficiency of import substitution are built out of the archives and data of the oil protectionist system. We build